California got more than $1 billion from AIG bailout

Municipalities including Golden State get total of $12.1 billion

AlistairBarr

SAN FRANCISCO (MarketWatch) -- Big banks and brokerages like Goldman Sachs weren't the only ones to benefit from the government bailout of American International Group Inc. last year.

California got $1.02 billion from contracts known as guaranteed investment agreements that the state had with AIG
AIG, +0.51%
according to disclosures by the insurer on Sunday.

States and other municipalities, including Hawaii, Ohio and Virginia, got a total of $12.1 billion from AIG's bailout.

For California, the payments, while smaller, may have eased the state's budget crisis a little.

"Billions in government assistance flowed to dozens of financial counterparties and municipalities during a time of acute stress in the economy," AIG Chief Executive Edward Liddy said in a statement.

Guaranteed investment agreements, or GIAs, provide institutions a certain rate of return on specific amounts of money. Providers promise to pay an agreed rate and get the money to invest in return. Profits are made on the spread between the rate the provider offers the buyer and the returns it can generate itself.

States often buy GIAs to a get return on money they raise from selling bonds before they use the funds for projects.

When GIA providers are downgraded by ratings agencies, they are often required to post more collateral to support the agreements, or come up with collateral if the contracts are terminated.

When AIG was downgraded by leading rating agencies last year, the insurer almost collapsed under the weight of massive obligations from credit derivatives, securities-lending agreements and GIAs. The government saved the company from bankruptcy with an emergency $85 billion loan, which helped AIG meet these obligations.

Goldman Sachs Group
GS, +0.26%
got $12.9 billion, while Bank of America Corp.
BAC, -0.50%
and Merrill Lynch together received $12 billion, as counterparties on credit derivatives and securities-lending contracts. These payments may have averted the collapse of another major financial institution. Read more.

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